Carroll joined a Missouri team that already had established players like Zaire Taylor, but over the course of his two years in Columbia, Carroll emerged as the team’s leader and alpha dog, which Anderson said took him to a whole new level.

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'alpha.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'alpha.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of alpha

Other Alphabet Terms

Financial Definition of ALPHA

What It Is

Alpha, also known as "excess return" or "abnormal rate of return," is one of the most widely used measures of risk-adjusted performance. The number shows how much better or worse a fund performed relative to a benchmark. This difference is then attributed to the decisions made by the fund's management.

How It Works

Let's assume you are a portfolio manager who expects your client's portfolio to return 15% next year. The year goes by and the portfolio actually returns 16%. In its most basic sense, the alpha of the portfolio = 16% - 15% = 1%.

where:r = the security's or portfolio's returnRf = the risk-free rate of returnbeta = the security's or portfolio's price volatility relative to the overall marketRm = the market return

The main part of the CAPM formula (except the excess-return factor) calculates what the rate of return on a certain security or portfolio ought to be under certain market conditions. Note that two similar portfolios might carry the same amount of risk (same beta) but because of different alphas, it's possible for one to generate higher returns than the other. This is a fundamental quandary for investors, who always want the highest return for the least amount of risk.

Why It Matters

The fundamental quandary for investors of how get the highest return possible for the least amount of risk can be measured by alpha. It is a measurable way to determine whether a manager's skill has added value to a fund on a risk-adjusted basis.

The very existence of alpha is controversial, however, because those who believe in the efficient market hypothesis (which says, among other things, that it is impossible to beat the market) attribute alpha to luck instead of skill, and base this belief on the fact that most managers fail to beat the market over the long-term.